Budget 2010: state pension 'triple lock' is not all it seems

Linking the benefit to earnings may not help many in the short term.

George Osborne, the Chancellor, announced in the Budget that from next April the basic state pension would be linked to earnings, rather than prices, which should ensure the value of this income kept pace with inflation.

However, those hoping for a large boost next April may be disappointed. The freeze on pay in the public sector is likely to depress earnings inflation this year and the next, while inflation is expected still to be running at 2.7pc at the end of the year.

Under a "triple lock" introduced by Mr Osborne, pensions will rise by a minimum of 2.5pc or in line with earnings or prices, whichever is greater.

But pensioners won't benefit from the increase to the income tax personal allowance, which will rise from £6,475 to £7,475 from April next year. Pensioners already benefit from an increased personal allowance of £9,490, which rises to £9,640 at the age of 75. These thresholds were frozen in Labour's last Budget – and there was no announcement that they would be changed this time.

However, there was mixed news for those saving into a pension. On the positive side, there were clear indications that Mr Osborne was considering repealing rules, due to come in next April, that would see higher-rate tax relief gradually withdrawn on pension contributions for those earning £130,000 or more. Mr Osborne said he was consulting on simpler alternatives that would keep tax relief in place, but limit the amount of money higher earners could put into a pension plan.

Organisations such as the National Association of Pension Funds have been calling for such a change, arguing that cutting the maximum annual contribution from £255,000 to £50,000 would still save the Treasury £3.5bn a year – but would be far simpler to put in place and administer.

The Government is also scrapping the rule that compels people to buy an annuity with their pension savings by the age of 75. This will be abolished next year, and in the interim the rules will be modified, so that those who reach their 75th birthday before this date will not be affected. A change to the Finance Bill will mean that those pension savers don't have to "annuitise" their pension until their 77th birthday.

But one blow to many pension savers will be the news that the Government plans to "accelerate" plans to increase the retirement age from 65 to 66. Previous proposals by the Conservatives said they would raise the state retirement age to 66 by 2016 for men and in 2020 for women – rather than between 2024 and 2026.

It remains to be seen whether plans to raise this age again to 68 by 2046 will also be brought forward. Further consultation will occur before a final decision. The Government will also consult on phasing out the default retirement age, which companies can use to force staff to retire.